Interview With Mitch McConnell; Interview With Mark Warner; Is the U.S. Economy Improving?

Aired April 18, 2010 - 09:00 ET

THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.

CANDY CROWLEY, HOST: All week long, we heard one word a lot.

(BEGIN VIDEOTAPE)

BEN BERNANKE, FED CHAIRMAN: A recovery in economic activity appears to have began.

PRES. BARACK OBAMA: We are headed in the right direction on our road to recovery.

(UNKNOWN): On our path toward economic recovery.

SECRETARY OF THE TREASURY TIMOTHY F. GEITHNER: That is hugely important to what's happening in the recovery.

(END VIDEOTAPE)

CROWLEY: Recovery. Newsweek was all in with a Monday cover story, "America's Back: The Remarkable Tale of Our Economic Turnaround." It seemed to many a tad overstated or at least premature, but the more conservative Wall Street Journal was bullish too, with its Thursday headline, "Evidence Mounts of Strong Recovery." In a Journal survey, three out of four economists said their growth forecast over the next 18 months will more likely prove too low than too high.

But go try selling that to the American people. In a CNN poll this week, only 19 percent said the economy is starting to recover. 34 percent said it is still in a downturn. Are things better than we think? And if so, what will it take to bring back consumer confidence? We will try to make sense of the economy. I'm Candy Crowley and this is "State of the Union."

Today, the battle over finance reform, with the Republican leader in the Senate, Mitch McConnell, and Democratic Senator Mark Warner. Then, making sense of the numbers with two top economic analysts.

A week of positive economic signs ended with the federal government filing fraud charges against Goldman Sachs, a fresh reminder about a financial system that failed in the first place. President Obama and key congressional leaders met Wednesday hoping to bridge the partisan divide on financial reform.

(BEGIN VIDEO CLIP) OBAMA: I am actually confident that we can work out an effective bipartisan package that assures that we never have too big to fail again.

MCCONNELL: This is a big, complicated subject. Another massive bill that we believe in its current form provides an endless taxpayer bailout of Wall Street firms. REP. NANCY PELOSI (D-CALIF.), SPEAKER OF THE HOUSE: For them to say it is a bailout for financial institutions just defies credibility in every way.

(END VIDEO CLIP)

CROWLEY: In his Saturday radio address, the president took directly after Senate Republican leader, Mitch McConnell.

(BEGIN VIDEO CLIP)

OBAMA: In doing so, he made the cynical and deceptive assertion that reform would somehow enable future bailouts, when he knows that it would do exactly the opposite.

(END VIDEO CLIP)

CROWLEY: We want of course to get the Senate minority leader to respond. We have Mitch McConnell. He is joining us from his home state of Kentucky. Senator, thanks for being here with us. Right off the bat, the president says you are being deceptive in describing this bill.

MCCONNELL: Well, Candy, he ought to talk to his own treasury secretary, who agrees with me, as well as the Washington Post and the Wall Street Journal, that there is a bailout fund in the bill that was reported out of the Banking Committee, the partisan bill that came out of committee on a party-line vote.

CROWLEY: But that still does not--

MCCONNELL: I don't think that's in dispute.

CROWLEY: But that bailout is funded by the banks themselves, is it not? It is not a taxpayer bailout?

MCCONNELL: Well, Robert Reich, who was Bill Clinton's secretary of labor, says it is a bailout fund. I mean, regardless of how the money is produced, it is a bailout fund that sort of guarantees in perpetuity that we will be intervening once again to bail out these big firms. The president's own secretary of treasury toward the end of the week confirmed that they would rather not have it in there. I think we are all in agreement that the bill that I was referring to, except maybe the president hasn't talked to his own secretary of the treasury, has a bailout fund in it.

CROWLEY: So it does appear, and CNN has been reporting that senior administration officials have said to Senator Dodd, take out this liquidation pool (ph) that you're talking about. OK, let's say they take it out. Is the bill OK with you? Can we move on then?

MCCONNELL: Well, there are some other problems with the bill. What we ought to do is get back to the table and have a bipartisan bill, which is what we don't have at the moment, because the bill that everybody is referring to, the only one we have at the moment, came out of the committee on a straight party-line vote. I think we need to get back to the table and get it fixed.

Look, I don't know anybody in the Senate who thinks we ought not to pass a bill. The question is, what's it going to look like? We want to make sure that we don't set up a system whereby we empower the government to continue to do what it has been doing -- running banks, insurance companies, car companies. We have now seen them nationalize the student loan business, which will cost 31,000 jobs. The American people are saying, we don't want another bailout, but they also don't want a kind of perpetual government massive interventions across the board running private businesses.

CROWLEY: The president's accusation that the senator is being deceptive is not all that the president had to say. We want to talk a little more about that right after this break.

(COMMERCIAL BREAK)

CROWLEY: Before we continue with Senator McConnell, here is a short breakdown of what's in the bill to regulate financial institutions. The new law would create an independent watchdog housed in the Federal Reserve and designed to protect American consumers from unfair financial practices. It also creates an oversight council to monitor the country's biggest financial firms to help identify potential risks before it is too late, and a $50 billion fund paid in advance by banks would be used to liquidate failed companies before they can infect the rest of the industry. The bill also calls for more scrutiny and regulation of derivatives, a bet that investors place to speculate on the future value of assets. Agreeing on how to regulate derivatives remains a huge sticking point.

Does this sound complicated? It is, and the Republicans don't like what they see. We will find out why when we come back with GOP leader, Mitch McConnell.

(COMMERCIAL BREAK)

CROWLEY: We are back with the minority leader in the Senate, Republican Mitch McConnell. Senator McConnell, the president pretty tough on you during his radio address. Here is a little more of what he had to say, and I will ask you a couple of questions on the back half (ph).

(BEGIN VIDEO CLIP) OBAMA: The leader of the Senate Republicans and the chair of the Republican Senate Campaign Committee met with two dozen top Wall Street executives to talk about how to block progress on this issue. Lo and behold, when he returned to Washington, the Senate Republican leader came out against common-sense reforms that we have proposed.

(END VIDEO CLIP)

CROWLEY: OK, so what the president is saying is you met with Wall Street leaders, with the man who raises money for Republican Senate races, and talked about how to block this bill. Did the meeting take place? What was the conversation? MCCONNELL: Well, we certainly didn't talk about blocking the bill. I don't know anybody who's in favor of blocking this bill.

MCCONNELL: I also met recently with the Kentucky bankers who are also opposed to this bill. The community banks, the little guys on main street. We're all meeting with a lot of people. This is the current subject. For the president to politicize this in the same speech in which he said we ought to de-politicize it is really quite amusing, the same day the Democratic National Committee is putting up Web ads trying to attack Republicans on this issue.

I thought he wanted us to have a bipartisan bill. That's what I would like to have. We are in the process of gathering information from people all across the country, from Wall Street to main street to try to get advice about doing this right.

Everybody in the Senate, everybody, Candy, in the Senate wants to pass a bill. But one that is opposed by the Kentucky bankers is certainly going to raise some concerns on my part. We need to fix it, get it right, and pass it on a bipartisan basis.

CROWLEY: Well, if the president is playing politics, you have to admit that it raises suspicions when you are meeting with Wall Street executives, as I take it you did, with Senator Cornyn, who raises money for Republican races. Doesn't that sort of set you up for this sort of accusation? That you went in there with the fund-raiser to talk about, you know, we've got to fight this bill.

I mean, what did you talk about?

MCCONNELL: Well, look, we were talking about financial regulation, as everybody in the country is talking about it. Most of the people in New York supported the president, the vast majority of them are on his side. They supported him during the election, they still support him. Is he saying we shouldn't sit down with his supporters and talk about a bill that he thinks we ought to pass and that I think we ought to pass? This is absurd, he...

CROWLEY: Why was Senator Cornyn there?

MCCONNELL: Candy, Candy, he is the one who is trying to politicize this issue. We are the ones who are trying to get it right. When the Kentucky bankers tell that this bill is a long way from being what we ought to pass, then it raises some concerns with me. And I think it does with all of our colleagues across the country who are hearing the same thing.

CROWLEY: Well, why was Senator Cornyn in the meeting? And what did the -- I understand what Kentucky bankers are telling you. But what did the Wall Street people tell you?

MCCONNELL: Well, they have concerns about the bill. The Kentucky bankers have concerns about the bill. We all have concerns about the bill. I have even heard the assistant Democratic leader of the Senate say he is not sure he can get all of his members to support this bill.

Right now, I think there is a pretty good shot -- a pretty good reason to believe that there is bipartisan opposition to this bill. We ought to go back to the drawing board and fix it.

CROWLEY: Let me try one more time. Why was Senator Cornyn in that meeting of all of the other senators you could have taken with you?

MCCONNELL: Senator Cornyn is a United States senator from Texas. He is going to be voting on this issue like all the rest of us are, simply because we are all involved in politics, as is the president. It doesn't mean that we can't discuss issues with people that we meet around the country who are deeply involved and concerned about what we are doing.

CROWLEY: Let me ask you about derivatives, hugely important here, because derivatives are those sort of hedge bets that financial institutions make, sort of against other investments that they may have. And they were a huge part of the melt-down. Do you believe that those derivatives ought to be public and open so that everyone knows where they come from, what they involve, and how much they cost? Blanche Lincoln has an amendment to that effect.

MCCONNELL: Well, it is my understanding that there is broad bipartisan support for changing the current way derivatives are regulated. And you are going to have shortly on your show one of the members of the Banking Committee, a thoughtful Democrat, Senator Mark Warner, who has been deeply involved in this, you should ask him as well.

But I think this is an area where we're going to have bipartisan agreements that there ought to be change. I'm not a member of the Banking Committee. I can't tell you exactly what the change ought to be. But I think there is a broad agreement that there ought to be change.

CROWLEY: Well, as a general principle, shouldn't those derivative transactions be open? Shouldn't we -- the public and the investors know everything about those derivatives and have them out in the open?

MCCONNELL: Well, as a general rule, I think we ought to improve the current system, which everyone seems to feel is falling short. Exactly how that will be done we will leave to the experts on the Banking Committee who hopefully can work that part of it out on a bipartisan basis.

CROWLEY: So you will agree with whatever the Banking Committee comes up with? MCCONNELL: Yes, we want to -- well, that's what we have been trying to achieve here is to resume the discussions that were going on within the committee. Senator Warner has been a big part of that, that were, we thought, going to lead to a bipartisan bill.

I'm hopeful that that will still happen. I think the fact that they reported a bill out of committee on a straight party line vote was not helpful.

CROWLEY: Senator, you know, are being charged at this point of rather -- that you would rather have this issue to take to the polls in November, to try to frame the Democrats as wanting endless bailouts rather than actually come to any sort of agreement. Do you risk being the party of no again?

MCCONNELL: That's not my view. I think we should get a bill. I think it needs to be done on a bipartisan basis. And we need to get it done as close to the right way as possible. This bill will have a lot more credibility if, unlike health care, which was jammed down everybody's throats on a partisan basis -- in fact, the only thing bipartisan about the health care bill was the opposition to it.

That is not how I view this bill. But I do think we need to get it right. We don't want to end up with the wrong kind of bill that exports our capital markets to London and Hong Kong and other places. The financial services industry in the United States has been an important part of our economy. We need to get this done correctly.

CROWLEY: Senator, let me turn your attention to the Senate Republican primary in Florida. Governor Crist, now well behind Marco Rubio. You have supported Governor Crist. There are inklings that this is a man who may quit the Republican race and run as an independent. Are you still fully behind Governor Crist?

MCCONNELL: I think we're going to elect a Republican senator in Florida. And the Republican primary voters in Florida are going to determine who that is. We have been looking at the surveys, as you indicate. It looks like Marco Rubio is running a very effective campaign and seems to have the lead. I'm going to be there behind the Republican nominee, whoever that is.

CROWLEY: What if Governor Crist runs becomes an independent? Is that something you can support? What happens to him as far as the Republican Party is concerned if he runs as an independent?

MCCONNELL: Well, he would lose all Republican support if he were to run as an independent.

CROWLEY: OK. One last question, really quickly, one of your colleagues has said vis-a-vis the deficit commission that tax hikes are on the table. Are they as far as you are concerned?

MCCONNELL: Well, we have appointed the commission the president created. And I am going to leave it up to them as to what they want to recommend. And then we will have a chance to vote on that. I don't think we have a problem because we tax too little. I think our biggest problem is we spend too much and we have been spending too much and borrowing too much. We don't need to add taxing too much on top of it.

CROWLEY: So they are not on the table?

MCCONNELL: Well, I'm not on the commission. I'm just giving you my view.

CROWLEY: All right. Thanks so much, Senator Mitch McConnell, the leader of the Republicans on the Senate side. We appreciate your time.

MCCONNELL: Thank you.

CROWLEY: Up next, a Democrat and former business executive who worked on the financial reform bill gives us his take, Senator Mark Warner of Virginia up next.

(COMMERCIAL BREAK)

CROWLEY: Now for the Democratic response, I am joined by Virginia Senator Mark Warner.

Senator, it's good to see you.

WARNER: Candy, great to see you.

CROWLEY: OK. Let's start out on this financial reform bill, since you have been working on it. A couple of questions here. First of all, administration officials have let it be known that they would just as soon let go of this $50 billion liquidation fund. Is that OK with you?

WARNER: Listen, there are different ways to get at this. But let's back up and look at where we started.

WARNER: One, this bill has been -- has been very bipartisan.

Senator Corker from Tennessee, Republican senator, and I have been working for more than a year, trying to get this right, recognizing our goal was, one, end too-big-to-fail; two, never have public taxpayer exposure again; and, three, make sure that we set up financial rules of the road for the 21st century.

The first thing we did was we created a systemic risk council so that all of the regulators could get together and have an early warning system to make sure that we didn't get in the crisis in the first place again.

Second, we put in place requirements that these large institutions would have to have additional capital, that we'd be able to limit the amount of leverage so it wasn't a traditional 10-1 or 15- 1 but we saw some 50-1 and 100-1 leverage rates that needed to be ratcheted back.

Third, we created a whole new area of what's called contingent capital that would convert to equity if a bank got in troubles again.

CROWLEY: That's the liquidation pool?

WARNER: No, no, that's just -- these are just trip wires, speed bumps to make sure we don't get to a crisis.

And, four, we put in place a requirement that said these large, systemically important firms -- they've got to write their own funeral plan, so that, if they get in trouble, there is an orderly process through bankruptcy that can unwind them appropriately.

We then said, even if that -- all those trip wires don't preclude a crisis, we then want to make sure there is orderly process through bankruptcy.

But if there's this crisis coming at once and you've got to use what would be called resolution -- and resolution, we set up in a way that it would be -- no rational management team would ever want it. It means the company's going out of business. It means it's being liquidated. It means the shareholders are going away. The management is disappearing. This truly is a death panel.

We're saying, how do you get through liquidation? We didn't want the taxpayer to fund that. So we said, if we put together a little bit of this fund, $50 billion that would be funded by industry, to keep the lights on until you could actually borrow enough money using the FDIC process to orderly resolve and get rid of the firm.

Now, if there's a way to cut that back or make it smaller, I'm willing to look at it. I'd love to hear from Senator McConnell and some of the others, specifics, not just general attacks.

But one of the things that I think is a bit hypocritical, if there hadn't been this fund, there potentially could be a gap in financing, right there, where the taxpayers could again be exposed.

CROWLEY: You know, the Democrats have really gone after Mitch McConnell for his saying, oh, this is a taxpayer bailout. I want to play you something that Secretary Geithner said recently about this very same fund.

(BEGIN VIDEO CLIP)

SECRETARY OF THE TREASURY TIMOTHY F. GEITHNER: If you create a fund in advance, there's a risk you're going to create more moral hazard. People will live in the expectation where the government will come in and protect them. We don't want to create that expectation. That's why we think it's better to do it after the fact.

(END VIDEO CLIP)

CROWLEY: So that's exactly what Senator McConnell has been saying, yes? WARNER: Well, I think what he -- what Secretary Geithner was talking about -- in the House bill, there's a -- there is a large -- larger fund, $150 billion. Nobody in the financial sector thinks that a $50 billion amount -- and, again, originally, Senator Corker and I suggested something in the neighborhood of $20 billion, $25 billion -- was going to be enough to, kind of, resolve a whole series of firms that might be going down simultaneously.

This is really a chance to buy a little bit of time and not have taxpayers exposed. There's different ways to get at this. There's a way to create a trust that could be funded through the industry. There's ways to, kind of, cut it back and give the FDIC borrowing ability a little bit quicker.

But what we'd like to hear from, you know, our Senate Republican leader is specific suggestions. I mean, this is Senator Corker and my best chance. It was bipartisan put together. If there's a better way and an easier way to do it...

CROWLEY: But you don't have Senator Corker's support at this point. All the Republicans have said the bill, as is, is not going to work. So there's not a bipartisan bill.

(CROSSTALK)

WARNER: What they have said is -- Senator Corker and others who have worked on this bill have said there are ways that can -- that the problems in this bill can be fixed, I think his term was, in five minutes. Well, let's get together and fix those problems. CROWLEY: Sure, but you've got a leader that's saying, "Put it on the floor"?

WARNER: Well, what we're saying is, let's put it on the floor so that we can offer the kind of amendments -- and I think there would be bipartisan amendments where there's areas -- if we can tighten it up, let's do it. But what I'd love to hear from the Republican leader is not these broad-brush critiques.

We're going to go back into session tomorrow. Let's have those three or four suggestions, put them out there. Let's talk about them. We've spent well over a year trying to get this to the best place possible.

The one thing, you know, those of us on the committee have been working on is we realize, if we mess this up, it could have huge implications downstream. So we want to get it right. This should not be a partisan issue. Getting it right, financial rules of the road for the 21st century, never again having the kind of meltdown where we had taxpayer exposure 18 months ago; and 18 months later, the fact that we still don't have new rules of the road -- I think it's time to get on with it.

CROWLEY: One of the things in this bill has to do with a couple of new agencies or entities that are going to watch over or something.

It struck me -- this Wednesday, Senator Levin held a hearing looking at what happened in the meltdown. And he said something I thought was really interesting.

(BEGIN VIDEO CLIP)

SEN. CARL LEVIN, D-MICH.: So where were the bank regulators? The painful fact is that they had a front-row seat to Washington Mutual's high-risk lending strategy, its poor-quality loans and substandard securitizations practices but did little to stop it.

(END VIDEO CLIP)

CROWLEY: OK, so -- and let me put up on the screen for our viewers just the number of financial industry regulators that are around, that already exist, and we still had the meltdown. They were asleep at the switch.

Goldman Sachs was -- at least has been charged with, and says it's innocent but has been charged with really monkeying around with these derivatives.

So you have all these regulators. Now you're going to create more regulatory agencies, more oversight committees. Why are they going to work any better than the multiple ones that are in place?

WARNER: Well, Candy, one of the things that failed in the last crisis was the fact that these individual regulators, one, didn't have current-time data, and, two, they were operating in silos. So one of the things we did create was not a new regulatory agency. As a matter of fact, we've consolidated bank regulators from four down to three. I'd like to see further consolidation.

CROWLEY: But you're talking trillions and trillions of dollars of transactions...

WARNER: No, let me answer the question.

(CROSSTALK)

WARNER: Let me answer the question. The question is, we've created a systemic risk council that says, let's make sure that the SEC, the prudential bank regulator, the Fed -- they actually all come together and share that information. Because some of these firms -- it may have been their broker -- broker-dealer that was causing the problem, not their banking component, but you've got to share above the silos.

Then we did create something that will give these regulators, on a current, daily basis, an exposure into the amount of all the transactions that are taking place, a so-called Office of Financial Responsibility.

It hasn't gotten any attention, but will give, real-time, that data. And this systemic risk council, which will be this early warning system, we think, will actually allow this aggregation of data that didn't take place in the past.

CROWLEY: I want to -- I have to ask you, really quickly here -- I said to Senator McConnell, listen, you look as though you want to take this to the polls rather than actually come -- come together.

The same can be said on the Democratic side, that you would much rather be able to go to the polls and say, "We don't have a single Republican on this bill; you see, they're on the side of Wall Street and we're not."

So aren't there politics being played on the both sides?

WARNER: Look, Candy, I'm still relatively new to this job, and I didn't get the memo yet that we weren't actually supposed to get stuff done in a bipartisan way.

(LAUGHTER)

I mean, Bob Corker and I have been working at this for a year. I know Judd Gregg and Jack Reed have been working on it. There's a lot of bipartisan action here. This should not be a partisan bill. My hope is we can get a bill that will get 75 votes.

Because, you know, we need to set financial rules of the road for the next 50 to 60 years. We had pretty good rules of the road that were set in the 30s that lasted us 80 years. I'd love to see a bill that will put the next 80 years' rules in place.

CROWLEY: When we come back, a closer look at those encouraging signs about the economy. Then we'll talk about what it all means with our panel.

(COMMERCIAL BREAK)

CROWLEY: Before we join our analysts, let's break down the optimistic news. Each day this week, another report, another piece of economic news, another analyst saying the worst is over. Monday, the Dow Jones Industrial Average closed above 11,000 for the first time since September, 2008. It finished above 11,000 for the week. A Wednesday report showed an encouraging upswing in March retail sales, 1.6 percent. That's the biggest jump since November.

Some of the optimism comes from people whose business depends on understanding those numbers. Fortune magazine quotes Warren Buffett, the oracle of Omaha, saying, "you can just feel the pulse of industry quickening." Jamie Dimon, CEO of JPMorgan Chase, says he sees plans for new hiring everywhere. Quote, "The strength and resilience of the American economy may surprise people."

In a moment, we will sort this out with Chrystia Freeland and Mark Zandi.

(COMMERCIAL BREAK)

CROWLEY: Joining me now to discuss the economy and much more is Chrystia Freeland, global editor at large for Reuters, and Mark Zandi, chief economist for Moody's Economy.com. Thank you all.

I want to start out with Goldman Sachs, which makes my head hurt trying to decipher what's going on. But essentially, what the government has charged Goldman Sachs with doing, correct me if I'm wrong, is selling a derivative that had been at least partially put together by someone who was betting against it, correct?

FREELAND: And the key part is there is the disclosure. You know, what the SEC is alleging is that John Paulson, who was the hedge fund manager who most brilliantly profited from the financial crash, that he helped to select the mortgages on which this derivatives would be based. He went out there and looked for what are the very worst subprime--

CROWLEY: What is going to fail.

FREELAND: What's going to fail.

(CROSSTALK)

FREELAND: I will invest in the failure, but then Goldman then went and sold this, mostly to European banks, without disclosing the fact -- and this fact is just alleged, right -- but without disclosing that Paulson helped to pick a basket of what he thought were going to be the worst performing subprime mortgages.

CROWLEY: So let's add that Goldman says, we did nothing wrong and they will prove it.

Having said that, it seems to me this might be just a little chilling to other places who also dealt in derivatives.

ZANDI: Well, I think any investigator who has seen this has now got to ask some big questions. I mean, was my investment bank on my side or were they working against me? And I would like to know. And it opens up potential lawsuits and other legal actions. So I am sure this is just the beginning of a flurry of activity.

CROWLEY: We were talking before we went on air, just the number of financial types who think that this charge against Goldman was timed to push financial reform.

FREELAND: Yeah, I spoke to a few Wall Street titans on Friday. I had lunch at the Four Seasons, where many of them were lunching, and you could see the discussion of this just sort of going through the room. And a lot of them were saying, you know, Obama is out to get us, this was timed, this was designed to push through financial reform.

I have quite a few doubts, first of all, that the SEC takes orders from the White House or even that government is that organized, but I do think that this case is going to strengthen the hand of people pushing for financial reform, and will very possibly make the bill tougher than it would have been otherwise.

CROWLEY: I want to move on to the economy, because I am always so confused by what we look at, but it seems to me we had hugely good numbers coming out this week.

ZANDI: We did. Yes.

CROWLEY: Is it -- OK, have we turned the corner? Are we at the corner? Where are we on this?

ZANDI: We are on our way. We are on our way. We're in recovery. The economy is gaining traction. I don't think the coast is clear yet. But I think we can't conclude that until we are creating a lot of jobs, at least enough jobs to start to bring down unemployment, and we're not at that point. But we are starting to create some jobs. Retailing activity is improving. Exports are up. So we're moving in the right direction. Everything says we should be in a much better shape six to 12 months from now.

CROWLEY: There was talk early on about oh, is it -- you know, is this really a recovery and might we go back down? So that done, this is solid? We're off?

FREELAND: I do think one of the things we should all have learned from the financial crisis is humility. And that anyone who thinks they know anything could be really wrong.

Having said that, what I've really noticed in the past few weeks is a change in sentiment. So behavioral economics has become really popular, the psychology of markets and the economy. And if you look at it through that prism, I think what has happened is we have moved from a vicious circle with everyone saying, oh, it is going to get worse, it is going to get worse, maybe I shouldn't hire, maybe I shouldn't do this new investment, to a virtual circle with people saying, yeah, you know, that jobs number, that was better than I thought. Wow, the consumer is going out and spending again. Hey, look at China, what an engine for the global economy. And I am really noticing sort of at the CEO level a lot more confidence.

CROWLEY: So where is -- where will the jobs be? And where is the smart money going right now?

ZANDI: Well, we're -- all along, we have been getting jobs in health care, educational services, it's demographically driven, government spending supports it. More recently, we have been getting jobs in manufacturing. That's turned. Logistics, so UPS for example announced great earnings, and that's symbolic of the improvement there. I think technology jobs are starting to kick in. Pretty soon, professional jobs. And I think six, 12 months from now, we will get jobs in retailing, leisure and hospitality. These are the big jobs creators. And once they're kicking in, that's when we start to see unemployment come down.

But you know, confidence is improving, and I think at the CEO level, that's correct, but if you look at measures of confidence among consumers, among small-business people, we are not there yet.

So I think we should be happy with where we are and where we are headed, but we're not there yet. The coast is not clear. CROWLEY: Just a real quick question, sort of a yes or no. Politically, the president is going to get credit if this economy turns around and his stimulus bill will get credit. Did the stimulus turn this around or is this a natural cycle?

FREELAND: Well, can't it be both?

CROWLEY: It can.

FREELAND: I mean, you know, recessions don't last forever.

ZANDI: You said yes or no, I thought.

CROWLEY: I know.

ZANDI: OK.

CROWLEY: She said, can it be both, which is sort of yes and no.

(LAUGHTER)

FREELAND: I think you would have a recovery no matter what. Even the Great Depression didn't last forever. But sure, the stimulus helped. Having said that, unless you see significant jobs recovery, I think that the impact on the midterms won't be that tremendous.

ZANDI: Absolutely, yes, it helped. I mean, there is no doubt in my mind that we would still be in recession without the stimulus package.

Now, it is a legitimate debate as to whether the stimulus was efficient. Did we spend taxpayers' dollars as well as we could have? That's a perfectly fine argument. But to say that this did not help would be incorrect. This did help.

CROWLEY: OK. We are going to come back with our analysts, but up next, times are still tough for millions of homeowners. A look at the foreclosure crisis and whether there is an end in sight there.

(COMMERCIAL BREAK)

CROWLEY: Before we move on, let's break down one of the black clouds: home foreclosures. RealtyTrac, a company that follows the industry, has newly released numbers showing in the first three months of this year, home foreclosures went up 35 percent. Six million homeowners are at least 60 days behind on their mortgage payments.

The Obama administration tried to stop the bleeding last April with its $75 billion foreclosure prevention program to improve mortgage rates and terms for borrowers. But after a year and over 1 million participants, just 231,000 people completed the program, 158,000 dropped out, and many more are waiting to see if their loan modifications go through.

A Treasury official defended the program's rocky start saying: "We continue to improve it based on lessons learned." Last month, the Obama administration unveiled changes to the program such as offering relief to unemployed homeowners and providing more incentives to banks and investors to reduce the principal on homes that aren't worth what is owed on them.

It is really too soon so know what the changes will do for homeowners in trouble. But RealtyTrac said by the end of the year as many as 1 million homes will have been taken over by banks. To end on a positive note, the number of delinquent mortgage loans is down now for the first time since 2006.

Back with Chrystia Freeland and Mark Zandi in a moment.

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CROWLEY: We are back with Chrystia Freeland from Reuters and Mark Zandi from Moody's Economy.com.

You're right, we should have reversed this. We should have done the bad news first and now be talking about the good news. We didn't. It seems to me when you look at the unemployment numbers, some of those jobs are not coming back, are they?

ZANDI: No. I mean, we have lost 8.4 million jobs from the peak to February, which is the bottom. Those 8.4 million jobs are going to be very difficult to get back. We will eventually do it. But it will take years. It is not something we are going to get back in months.

FREELAND: Yes, and you have to create 100,000 jobs a month just to absorb the new entrants into the economy. So, you know, as Mark says, I think that what we may see is a sort -- an economy of -- two tales of the economy, with the corporate picture we're already seeing improving, Wall Street getting more excited, but on main street it taking longer for people to feel good. Because if you don't have a job, it is hard to be very excited about the economy and it's hard to feel really confident.

CROWLEY: And just to look at it, though, just in terms of sheer numbers, more people are employed than are unemployed.

ZANDI: Oh, sure.

CROWLEY: And so a lot of it has to do with just the feel of things, doesn't it? To the people who are still -- you know, they need to get people who are employed to stop being afraid they are going to to be unemployed, right?

ZANDI: Yes, absolutely. But you have a 9.7 percent unemployment rate. That's 15 million Americans. You throw in all the folks that are underemployed, working part-time because they can't find a full- time job. We are up to -- you know, close to 25 million people.

We need to get that number down. Until that number starts falling in a very clear and definitive way, I don't think people are going to feel good about anything.

FREELAND: Yes, that's right. And also the high unemployment number does have an impact on people who are employed, because it tends to depress wages. If there is 9.7 percent unemployment, you don't have to pay people that extra premium to get them to work.

The other thing that I think is going to be difficult and mean the unemployment numbers look bad for a while is even as there is more employment, more jobs created, people who had decided to withdraw from the workforce and have stopped looking for jobs, are going to go back and look.

So the number that we talk about, that headline unemployment number, will keep on looking pretty scary for a while.

CROWLEY: So when you look at the entire scene with the black cloud part of the scene, what worries you the most when you look at the economy overall? What is out there that could undo the progress that we have seen?

ZANDI: Well, the first thing is, we need to see hiring. Businesses have stopped laying off, thus the end of the job losses. But we need to see firm hiring. We need to see the CEO confidence translate into real jobs, real hiring.

CROWLEY: And why hasn't it?

ZANDI: I think part of it is a lack of confidence. I mean, we were put through the proverbial ringer. It was just a year ago that firms were evaporating, right? We were worried about major financial firms going under. So you don't forget that quickly. Credit, small business people are key to the job machine. And if they can't get credit, then there are not going to be people to create jobs. So that's number one. Foreclosure, as you mentioned, number two. State and local governments and their fiscal situation is number three. Commercial real estate, number four. So we've got a few things to worry about.

FREELAND: I would really -- of those, I agree with all of them. I would really emphasize the state and local government point. You know, we have states saying they are going to go down to four days a week of school. And that is really potentially going to hurt the employment picture and hurt the confidence picture.

And then the final thing, which I don't this is a this-year problem but could start really being an issue next year and the year after, is the fiscal situation. So, you know, right now, we are in the situation where the focus is and needs to be on, will the economy recover? But it is sort of a race. Will the economy recover quickly enough to be strong enough to handle the really tough fiscal medicine that the United States is going to have to take?

CROWLEY: And when you talk about that, you are talking about either tax increases -- well, probably both, right?

FREELAND: Oh, yes.

ZANDI: Sure.

FREELAND: Higher taxes, less government spending. And if you have a weak economy on top of that, that is not a pretty picture.

CROWLEY: Just in our final moments here, there is always this argument, at least among politicos, that the deficit really doesn't matter to people. They don't really get it. Does -- what is the danger of deficits this high?

FREELAND: Well, at the end of the day, if the deficit gets too big, America will start having to pay a lot more money -- a lot more interest, a lot more money to borrow money from the rest of the world. Part of the reason that the deficit doesn't matter so much right now and has mattered less for America than it does for, say, Greece, is the rest of the world is willing to trust America more than it trusts anybody else.

So even though America has a big deficit, it is borrowing money at really favorable rates. At some point, the tolerance of the international community will end and then, just keeping up with the debt, the same way if you have a credit card bill that's too high, you are spending a lot on interest payments. And that's just treading water.

CROWLEY: I have to let it stop there. I cannot thank you enough, Chrystia Freeland, from Reuters, Mark Zandi from Moody's Economy.com, you both are terrific. Thank you so much for making us look smart. We like that.

ZANDI: Thank you.

CROWLEY: Coming up, a quick check of the day's headlines. Then, what is your news IQ? A recent quiz reveals some interesting answers.

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CROWLEY: I'm Candy Crowley and this is "State of the Union." Let's check some of the stories developing this Sunday.

A funeral mass is under way for Poland's president Lech Kaczynski and his wife. The couple and more than 90 others, including many officials of the Polish government were killed in a plane crash last weekend in western Russia. About 1.5 million people lined the streets of Krakow for the funeral procession.

President Obama and several other heads of state had planned to attend the funeral but were forced to cancel their trips because of volcanic ash that has shut down most air travel across Europe.

It's not clear when flights in Europe will resume because the volcano in Iceland is still erupting ash. That's left millions of passengers around the world stranded. Geologists say there doesn't seem to be an end in sight to the volcanic eruptions. But KLM, the Dutch subsidiary of Air France, says it's carried out a test flight through the ash cloud without suffering any damage. The airline says it plans to fly seven planes without passengers from Amsterdam to Dusseldorf today and hopes to resume passenger flights soon.

Iran's president says the country's military is so strong, no other nation would risk an attack. Mahmoud Ahmadinejad made the comments today during a military parade that showcased Iran's surface- surface missiles. His remarks come as the New York Times reports that Defense Secretary Robert Gates warned in a January memo to President Obama's national security adviser Jim Jones that the United States lacks a long-term plan for dealing with Iran's nuclear program.

Pope Benedict today met with victims of a sex abuse scandal that has engulfed the catholic church. The meeting took place on the Mediterranean island of Malta, where the pontiff celebrated mass.

The Vatican says Benedict expressed shame and sorrow at the pain that the victims suffered at the hands of priest. He also promised the church would do everything possible to bring justice to victims and prevent any more abuse from happening. The victims the pope met with are among 10 men who say they were abused by priests at an orphanage during the 1980s and 90s.

And the Space Shuttle Discovery is preparing to return to earth. Discovery is wrapping up a 14-day mission to the International Space Station. Shuttle astronauts made three space walks during the trip. Landing is set for tomorrow morning.

Those are your top stories here on "State of the Union." When we come back, news IQ: How well did Americans do on these three economic questions?

Which of these foreign countries holds the most U.S. debt?

How much of the oil consumed in the U.S. is imported?

And is the national unemployment rate closer to 5 percent, 10 percent, 15 percent, or 20 percent?

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CROWLEY: And now our "American Dispatch."

The Pew Research Center polled Americans in January on their knowledge of current events. Americans didn't do all that well on political questions like how many votes it takes to break a filibuster, but we've gotten pretty good at economic questions, maybe from hard experience.

Who holds most of the U.S. debt? Fifty-nine percent got China.

What percentage of U.S. oil is imported? Fifty-seven percent got two-thirds.

For what it's worth, Republicans scored 14 points higher than Democrats. Men scored 16 percent higher than women. And older Americans scored higher than younger ones. But on one point, most of us would fail now. Since the poll was taken, China sold off a substantial portion of its U.S. Treasury holdings. Now Japan holds the most U.S. debt. And now you know.

Nearly 1.5 million have already taken this quiz, posted on the Web site of the Pew Research Center.

Thanks for watching "State of the Union." I'm Candy Crowley in Washington.